AI NIETO, Clarence Valdez, Adrian Munenmann, Lester Olivera and Joana L. Gonzales, Plaintiffs-Appellants v. Louis ECKER, et al., Defendants, and Roger Frommer, Defendant-Appellee
No. 87-5598
United States Court of Appeals, Ninth Circuit
May 2, 1988
The Matisons sued Transamerica charging that this “partial settlement” breached their title insurance contract and that the settlement itself was a breach of the insurer‘s duty to them. The case was submitted on the basis of documents and stipulated facts. The district court held that it was Transamerica‘s duty to defend the title and that it had fulfilled this duty by settling Schwarz’ action to quiet title. Transamerica‘s settlement, the district court ruled, “did not impair any duty under its contract with the insured.” From the district court‘s adverse judgment, the Matisons appeal.
ANALYSIS
When Transamerica settled the claims against itself and its other insureds on condition that Schwarz pursue the tort and contract claims against the Matisons, Transamerica benefited itself at the expense of the Matisons. Transamerica was not a fiduciary for the Matisons. Transamerica did not have a duty to prevent all harm to them. Transamerica did not have a contractual duty to the Matisons to defend them against the tort and other claims. Transamerica did have a duty of “a fiduciary nature” not to benefit at the expense of its insured. Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 571 (1986). The duty may be breached even though Transamerica performed its express contractual undertakings. Id. at 573. A “Gallagher covenant,” when entered into by an insured company, is subject to this duty that Arizona imposes on an insurer. Transamerica was required to give “equal consideration” to the Matison‘s interests which it did not do. Id. at 571. Instead, Transamerica agreed to an arrangement whereby it might not pay a penny while committing Schwarz to pursue the Matisons vigorously. Such connivance against one‘s insured is incompatible with the fiduciary-like duty an insurer, according to Rawlings, assumes by issuing a contract of insurance. Transamerica wrongfully placed “paramount importance on its own interest.” Id. at 573.
That negotiations between Schwarz and Transamerica were in progress was probably known to the Matisons; in that sense the negotiations were not secret. But the Matisons’ lawyer was excluded from the negotiations, so that what was going on was kept a secret from them. This secrecy, for which Transamerica‘s settlement counsel must take responsibility, emphasizes the unfaithful character of Transamerica‘s effort to gain at its insured‘s expense. Infidelity of this kind made Transamerica “a second source of injury to the insured.” Id.
Attorney‘s fees are awardable to the Matisons in the discretion of the court.
REVERSED. Judgment is to be entered for the appellants in conformity with this opinion. The appellants shall submit to this court a statement of attorney‘s fees incurred on this appeal.
Paul M. Posner, Marina del Rey, Cal., for plaintiffs-appellants.
William W. Taylor, U.S. Dept. of Labor, for amicus.
Before TANG, WIGGINS and KOZINSKI, Circuit Judges.
Defendant Roger Frommer is an attorney who rendered professional services to a group of employee retirement plans covered by the Employee Retirement Income Security Act of 1974,
Facts
Plaintiffs are members of Operative Plasterers’ and Cement Masons’ Locals No. 341 and 627, labor unions affiliated with the Cement Masons’ Negotiating Committee for Southern California (the Committee). The Committee, representing each of its constituent local unions, entered into agreements with various associations of employers in Southern California establishing health and welfare, pension, apprenticeship and vacation savings trust funds (the Funds) to be financed by mandatory employer contributions. The Funds are multiemployer plans subject to ERISA, and plaintiffs are, by virtue of their membership in Locals 341 and 627, participants in the Funds.
On August 11, 1986, plaintiffs brought suit in federal district court against numerous defendants, including the Funds, their trustees and Frommer, an attorney retained by the trustees to represent the Funds in collecting delinquent contributions from employers. Plaintiffs alleged that Frommer had repeatedly failed to prosecute lawsuits to collect delinquent contributions and had been paid attorney‘s fees for services that he did not render. The complaint included claims under ERISA and state fraud law, and prayed for relief in the form of restitution to the Funds, punitive damages and injunctive relief.
The district court dismissed the pendent state claim against Frommer,1 and also dismissed, with leave to amend, the ERISA claims against Frommer on the ground that no facts had been alleged to show that he was a fiduciary of the Funds. Plaintiffs filed an amended complaint alleging that Frommer “was a fiduciary in that he exercised authority and control respecting management or disposition of the [Funds‘] assets....” Excerpt of Record at 73. The district court again dismissed the action as to Frommer, this time without leave to amend.
Discussion
The district court granted Frommer‘s motion to dismiss under
I
Plaintiffs first argue that Frommer is a fiduciary of the Funds within the meaning of ERISA and is therefore subject to all the duties and liabilities imposed on fiduciaries by that statute. Under the Act, “a person is a fiduciary with respect to a plan to the extent (1) he exercises any authority or control respecting management or disposition of its assets....” ERISA § 3(21)(A),
We resolved this issue in Yeseta v. Baima, 837 F.2d 380, 385 (9th Cir. 1988). Relying on the applicable Department of Labor regulations, Yeseta held that an attorney rendering professional services to a plan is not a fiduciary so long as he does not exercise any authority over the plan “in a manner other than by usual professional functions.” Id. (citing
Plaintiffs contend, nevertheless, that Frommer effectively exercised such authority because the employer contributions he failed to collect were plan assets under his discretionary control. By failing to collect those contributions, the argument runs, Frommer dissipated those assets. This argument proves far too much. Under this rationale anyone performing services for an ERISA plan—be it an attorney, an accountant, a security guard or a janitor—
II
A. Plaintiffs contend that, even if Frommer is not a fiduciary, he may still be held liable under ERISA section 409(a) as one who conspired and acted with fiduciaries in the breach of their fiduciary duties. That section provides:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate....
The plain language of section 409(a) limits its coverage to fiduciaries, and nothing in the statute provides any support for holding others liable under that section. Several courts have nevertheless held that section 409(a) imposes liability on non-fiduciaries insofar as they abetted fiduciaries in their breaches of duty. See, e.g., Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1988); Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1220-21 (2d Cir. 1987); Thornton v. Evans, 692 F.2d 1064, 1078 (7th Cir. 1982); Donovan v. Daugherty, 550 F.Supp. 390, 410-11 (S.D. Ala. 1982); see also Fink v. National Sav. & Trust Co., 772 F.2d 951, 958 (D.C. Cir. 1985) (dicta). These courts uncritically adopted the reasoning of the seminal case in this area, Freund v. Marshall & Ilsley Bank, 485 F.Supp. 629, 641-42 (W.D. Wis. 1979). We have carefully considered Freund‘s rationale and conclude that it provides no basis for departing from the plain meaning of the statute.
Freund started with the proposition that, in enacting the fiduciary duty provisions of ERISA, “the intent of Congress was to federalize the common law of trusts” and apply it to ERISA plans. 485 F.Supp. at 635. The court then reasoned: “In view of the expressed Congressional intent in enacting ERISA ‘to make applicable the law of trusts,’ the court is fully empowered to award the relief available in traditional trust law against non-fiduciaries who knowingly participate ... in a breach of trust.” Id. at 641-42. As the only support for this proposition, Freund cites a floor statement by Senator Williams, one of the Act‘s sponsors, proclaiming that the goals of the fiduciary liability provisions were “to make applicable the law of trusts; ... to establish uniform fiduciary standards to prevent transactions which dissipate or endanger plan assets, and to provide effective remedies for breaches of trust.” Id. at 635 (quoting 120 Cong.Rec. 29,932 (1974), reprinted in 1974 U.S.Code Cong. & Admin. News 4639, 5177, 5186) (emphasis added).
Senator Williams’ rather nebulous statement hardly justifies engrafting the complete body of state trust law into ERISA. As courts of limited jurisdiction, our power to adjudicate claims is limited to that granted by Congress, and such grants are not to be lightly inferred. See General Atomic Co. v. United Nuclear Corp., 655 F.2d 968, 968-69 (9th Cir. 1981) (federal courts are “presumed to lack jurisdiction in a particular case unless the contrary affirmatively appears“), cert. denied, 455 U.S. 948, 102 S.Ct. 1449, 71 L.Ed.2d 662 (1982); see also Victory Carriers, Inc. v. Law, 404 U.S. 202, 212, 92 S.Ct. 418, 425, 30 L.Ed.2d 383 (1971). Plaintiffs’ lawsuit against Frommer is essentially an attorney malpractice suit under state tort law. Absent an explicit directive from Congress, we may not
In any event, Freund and the cases following it have built very much on very little. As we read Senator Williams’ statement, it merely directs the courts to rely on state law principles in adjudicating claims otherwise within the scope of the Act. Read in this fashion, the floor statement fully accords with the statute‘s language and purpose; it provides no support for the incorporation of state law causes of actions as a supplement to the explicit provisions of ERISA.2
Amicus the Secretary of Labor argues that we have already recognized ERISA‘s incorporation of the common law of trusts, citing Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983), cert. denied, 464 U.S. 1040, 104 S.Ct. 704, 79 L.Ed.2d 169 (1984), and Terpinas v. Seafarer‘s Int‘l Union, 722 F.2d 1445 (9th Cir. 1984). Terpinas is irrelevant; it holds that, in an action to recover benefits under ERISA § 502(a)(1)(B),
Our reading of ERISA is supported by the Supreme Court‘s decision in Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985). In Russell the Court held that a private right of action for extra-contractual damages could not be implied under ERISA. This conclusion was based on the Court‘s view of ERISA as a carefully crafted, “‘comprehensive and reticulated statute,‘” 473 U.S. at 146, 105 S.Ct. at 3093 (quoting Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 361, 100 S.Ct. 1723, 1726, 64 L.Ed.2d 354 (1980)): “The six carefully integrated civil enforcement provisions found in § 502(a) of the statute as finally enacted ... provide strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.” 473 U.S. at 146, 105 S.Ct. at 3093. As the Court noted, “where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it.” Id. at 147, 105 S.Ct. at 3093 (quoting Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 246-47, 62 L.Ed.2d 146 (1979)). Congress has provided a remedy against fiduciaries alone in section 409(a) and we see no basis for reading into that section a remedy against non-fiduciaries as well. Most of the courts that reached contrary conclusions did so before Russell and may have occasion to revisit the issue in
We therefore hold that only fiduciaries as defined by ERISA may be sued under section 409(a).
B. Concluding that plaintiffs cannot obtain relief against Frommer under section 409(a) does not end our inquiry. Plaintiffs and amicus contend that the broad equitable powers conferred on us by ERISA section 502(a)(3) also authorize the relief they seek.4 That section provides:
A civil action may be brought—
....
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan....
One district court has held that this language permits the equivalent of an action for damages under section 409(a) against non-fiduciaries who have participated in a breach of trust by fiduciaries. See Foltz v. U.S. News & World Report, 627 F.Supp. 1143, 1167-68 (D.D.C. 1986). We respectfully disagree. Permitting recovery of damages under section 502(a)(3) would render section 409(a) superfluous, a result contrary to a fundamental canon of statutory construction. See, e.g., Beisler v. Commissioner, 814 F.2d 1304, 1307 (9th Cir. 1987); 2A N. Singer, Sutherland‘s Statutory Construction § 46.06 (4th ed. 1984).
Nevertheless, Frommer is not free from potential liability under ERISA. While he is not a fiduciary, he does have a status defined by the Act: Because he provides services to the Funds, he is a “party in interest” under ERISA § 3(14)(B),
It is true that section 406(a) only prohibits certain transactions by fiduciaries, and does not expressly bar parties in interest
Conclusion
We hold that plaintiffs have stated a claim for relief against Frommer under ERISA sections 406(a)(1) and 502(a)(3). Accordingly, if plaintiffs prevail on the merits, they will be entitled to whatever equitable relief—including the issuance of an injunction or the imposition of a constructive trust upon property improperly received by Frommer—as the district court may deem appropriate. Plaintiffs cannot state a claim against Frommer under section 409(a), however, because he is not a fiduciary; thus they have no remedy against him for damages under ERISA.
The judgment of the district court is AFFIRMED IN PART, REVERSED IN PART AND REMANDED for proceedings in accordance with this opinion. The parties shall bear their own costs on appeal.
WIGGINS, Circuit Judge, concurring.
Judge Kozinski correctly finds that Frommer should be potentially liable for various violations of ERISA. He finds that Frommer is a “party in interest” under ERISA section 3(14)(B),
Of greater significance, however, is Judge Kozinski‘s rejection of Frommer‘s liability under section 409(a) of ERISA.
Judge Kozinski applies what he terms a “plain language” analysis to section 409(a). At 871. He notes that by its terms 409(a) refers only to the liability of “fiduciaries.” He argues, therefore, that resort to the legislative history of ERISA is inappropriate. However, 409(a) must not be read in isolation. It is simply one section among many that impose liability on those who violate the substantive provisions of the ERISA Act. Section 409(a) must be read in conjunction with the rest of the Act. For example, section 502(a)(3),
Judge Kozinski also rejects Sen. Williams’ statement that Congress intended in ERISA “to make applicable the law of trusts; ... to establish uniform fiduciary standards to prevent transactions which dissipate or endanger plan assets, and to provide effective remedies for breaches of trust.” 1974 U.S.Code Cong. & Admin. News, pp. 4639, 5186, 93d Cong.2d Sess., 1974 (hereinafter “Leg.Hist.“). He notes that Freund, the seminal case finding that ERISA remedies include common law trust remedies, principally relies on this statement. Sen. Williams’ remarks, however, are not the only statements in the legislative record supporting the application of common law trust principles to ERISA. In Eaves v. Penn, 587 F.2d 453, 462 (10th Cir. 1978) a pre-Freund case, the Tenth Circuit noted that various other Committee reports addressed in the original ERISA Bill demonstrate congressional intent to provide the broadest possible remedies under ERISA.
For example, the Senate Committee on Labor & Public Welfare in its “do pass” report, stated that the “fiduciary responsibility section, in essence, codifies and makes applicable to these fiduciaries certain principles developed in the evolution of law of trusts.” Leg.Hist. at 4865. The Report further states that the core principles of fiduciary conduct under the Act are adopted from existing trust law. Leg.Hist. at 4866. The House Report of the Education & Labor Committee also states that “[t]he principles of fiduciary conduct are adopted from existing trust law....” Leg. Hist. at 4651. Thus, support for the proposition that common law trust principles are incorporated into ERISA is found not only in a floor statement by a single senator but is amply supported by Committee reports and other legislative history.
The opinion reaches the right result in finding Attorney Frommer potentially liable under ERISA. However, Judge Kozinski creates a needless circuit conflict by rejecting his liability under 409(a). I would adopt the holdings of the numerous other circuits that have previously addressed the issue.
This circuit has also broadly held that “[i]n effectuating this provision [Section 409(a)], Congress intended the courts to draw on the principle of traditional trust law.” Mazzola, 716 F.2d at 1235 (citing Freund). Judge Kozinski attempts to dismiss Mazzola. He states that Mazzola “merely notes that Congress derived the Act‘s provisions relating to fiduciaries from the common law of trusts,” and does not stand for the proposition that the common law of trusts supplies a federal remedy where the statute itself does not seem to provide one. At 872. Judge Kozinski, however, misconstrues Mazzola. What Mazzola did find was that a proper 409(a) remedy, borrowed directly from the law of trusts, included the posting of a one million dollar bond to provide security to protect against losses to an ERISA plan. The district court had ordered the posting of the bond by the plan‘s trustees until the balance on a bad loan made by the trustees was reduced to a certain figure. The court noted that though 409(a) did not by its terms provide for such a bond “[w]here there has been a breach of fiduciary duty, ERISA grants to the courts broad authority to fashion remedies for redressing the interests of participants and beneficiaries.” Mazzola, 716 F.2d at 1235 (citing Eaves v.
Notes
Mazzola, 716 F.2d at 1238-39 (citations omitted).At common law, the court could completely remove a trustee if the court found that continuation as a trustee would harm the beneficiary‘s interests.... Under the broad remedial provision of ERISA courts have also found removal of fiduciaries to be an appropriate remedy upon findings of imprudence, divided loyalties, and prohibited transactions. See e.g., Freund.... Thus, in the present case where the trustees committed numerous ERISA violations, the district court acted well within its broad discretion in divesting the individual appellants of their investment functions as trustees of the Pension Fund.
Except as provided in section 1108 of this title:
(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect—
....
(B) lending of money or other extension of credit between the plan and a party in interest;
(C) furnishing of goods, services, or facilities between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan....
The prohibitions provided in section 1106 of this title shall not apply to any of the following transactions:
....
(2) Contracting or making reasonable arrangements with a party in interest for ... legal ... services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.
The fact that Congress has provided an explicit penalty for parties in interest who participate in prohibited transactions does not affect our conclusion that section 502(a)(3) provides a remedy against such persons. The tax is not a remedy but, in essence, a civil penalty; interpreting the tax as exclusive would leave plans and their participants with no recourse against persons clearly covered by the Act who violate its provisions, not a result likely contemplated by Congress.
Moreover, section 4975 clearly contemplates that the tax does not foreclose remedial action by the Secretary of Labor and, implicitly, participants or beneficiaries as well. Under section 4975(h), the Secretary of the Treasury is required to notify the Secretary of Labor before sending a notice of deficiency with respect to the tax in order to give the latter “a reasonable opportunity to obtain a correction of the prohibited transaction....”